Question

ABC, Inc has a policy to pay dividends every year and they expect to raise the dividend payment by a constant growth rate each year. The expected stock price for the ABC, Inc is 35.00 in 5 years and $42.87651 in 8 years. Using the Dividend Discount Model, what is the implied growth rate for ABC stock? 1) 6.8% 2) 7.1% 3)70% 4) 6.9% Next Page Page 10 of 20 Go to Sult 3 5 6 7 8 9 0 E R T Y U

Answer 1

Answer:

Correct answer is : 3) 7%

Explanation:

Expected share prices are determined using dividend discount model. Under constant growth assumption of dividend, dividend and share price grow at the same rate. The capital and dividend yield remain same.

Let us assume:

Constant growth rate = g

If in year 5, expected share price =$35

In year 8, expected share price will be = $35 * (1 + g) ³

Hence,

$35 * (1 + g) ³ = $42.87651

=> (1 + g)³ = $42.87651 / $35 = 1.225043

=> g = 7%

As such option 3) is correct. All other options are incorrect.